Business Crime Insurance for Employee Theft & Other Risks

Over a four year period, one Massachusetts employee stole $1.5M from her two employers: a Cape Cod store and a construction company. The employee is now serving jail time. But will the businesses get their money back?

Business crime insurance is often misunderstood or overlooked because of how it overlaps with the coverage in a basic business owner’s policy. Owners tend to think they already have it. Or else they’re not too concerned about buying it. After a year defined by lockdowns and supply chain nightmares, most business owners don’t rank “employee theft” too highly on their list of concerns, anyway.

But increasingly, SMBs are losing money from criminals working in and around their organizations. According to the latest stats, small and mid-sized businesses represent 68% of all employee theft cases, suffering median losses of $290,000.

Here’s what else we know: certain industries are affected more than others. Banking and financial services lead the list, while companies in manufacturing, retail, and construction aren’t too far behind, according to a 2018 study compiled by the Association of Certified Fraud Examiners.

So, if you think your business can’t afford to lose any cash, valuable merchandise or supplies, you’ll want to read the following FAQs on business crime/commercial crime insurance:

Does business insurance cover employee theft?

Probably not. Your commercial property coverage does include protection against some types of theft (e.g., a random burglary)… but with two key exclusions:

• Commercial property insurance does not cover stolen cash (only tangible assets like computers or product inventory)
• Commercial property insurance does not cover incidents of employee theft. If the crime is committed by you, your partners, or anyone on your payroll, it’s excluded.

Now, you might be saying, “really?! What good is insurance then?” But these exclusions make sense if you stop to think how easily insurance fraud could be committed without them. More important, now that you know these exclusions exist, it’s time to think about patching the gap with a business crime insurance policy.

What is business crime insurance or commercial crime insurance?

Business crime insurance is a line of coverage specifically designed to protect businesses from theft and fraud. Because it helps to bridge some important gaps between what commercial property insurance will and won’t cover, it’s most often associated with employee theft. And you might see it referred to as “fidelity insurance,” “employee theft coverage,” “or employee dishonesty coverage.”

But in fact, crime insurance can be broader than that. It can be written to cover incidents of theft or fraud whether the source is internal (an employee); external (a random thief or cybercriminal); or a combination of both, working together.

Where/how can I buy business crime insurance?

Depending on the type of business you own, you may find crime insurance already offered as part of your overall commercial package, bundled together with liability coverage, etc. Or, you may need to purchase it as a standalone policy. Ask your agent to outline different carrier options.

The ISO (an organization that defines standard insurance policy language) divides commercial crime insurance into eight different sections: one for employees, seven for outside perpetrators. Each section outlines different terms and provisions. Some insurance carriers borrow this language verbatim in their crime policies; others pick and choose only portions of the ISO language. So, it’s important to think about the different types of theft exposure that could affect your organization. Ask your agent to walk you through some of today’s common scenarios. He or she can explain which policies and/or endorsements will address your needs.

What does commercial crime insurance cover?

Broadly speaking, commercial crime policies are intended to address business theft, forgery, embezzlement, unauthorized funds transfer, computer fraud, check fraud, billing or payroll fraud.

However, as noted above, commercial crime coverage can be structured in different ways, depending on your carrier’s offerings and the wording in their policy. In addition to purchasing a baseline crime insurance policy, you may need to select specific endorsements, to ensure you are addressing your most prominent risks. For example:

• Do you need coverage for theft occurring off premises?
• Do you need ERISA coverage, in case your pension plan officer embezzles from the company-sponsored plan?
• Do any of your employees have the authority to wire funds?
• Are you concerned about employees stealing from your clients?

These are examples of specific risks that may require special consideration and underwriting.

Keep in mind too, employee theft is rarely a one-time occurrence. Instead, the crime often happens over an extended period of time. To hedge against ongoing losses, ask you agent to review the two different types of crime coverage: “loss discovered” and “loss sustained.” The first type of coverage kicks in so long as your policy is active when the crime is discovered (even if the thief started raiding your register five years ago). The latter type is only applicable if the crime occurred during the policy’s term.

What is not covered by crime insurance?

Every policy comes with different terms and exclusions, so there’s no universal list. However, some types of losses that generally would NOT be covered by a crime policy include:

• Legal expenses (bringing the employee to court)
• Investigative expenses (uncovering the crime or proving the full extent of it)
• Losses incurred after you already know an employee has stolen from you or a past employer (e.g., no coverage for giving second chances)
• Stolen data (e.g., client lists, company documents, secret recipes, intellectual property)
• Losses claimed solely based on inventory records (without clear evidence of theft)
• Salary or bonuses already paid to the employee who turns out to be stealing
• Indirect losses (e.g., lost income from work days or projects that can’t happen because computers or equipment were stolen)

Does my business need crime insurance?

Anyone who runs a business with a significant amount of cash and/or high-value inventory on hand should consider crime insurance. If your employees bring cash or products off premises—to tradeshows, live events, or as part of a delivery service (e.g., cannabis delivery)—exploring crime coverage is also a good idea. Increasingly, crime insurance makes sense for businesses who sell products online, too.

To give you some context, asset misappropriation accounts for 89% of all business theft. This category includes theft of cash, billing schemes, payment schemes, check and payroll tampering, as well as theft of non-cash assets (which is the most common business crime of all). Could any of these crimes occur, at a significant level, at your company?

Does crime insurance cover my business against employees who steal from clients?

This is a tricky question. But it’s also very important for businesses that send employees into clients’ homes or offices. What if your landscaping crew swipes a laptop from a client’s car? What if your IT support employee steals a badge, later entering an office building after hours?

The short answer is that commercial crime insurance may not cover cases like these. That’s because standard crime coverage applies solely to the property of you, the policyholder.

In order to extend theft coverage to third parties—like your clients—you would probably need to ask your agent about adding a commercial crime endorsement. (Usually, it would be Clients’ Property Endorsement CR 04 01.) This is one common example of how businesses can and should customize a crime policy to ensure it’s addressing their risk profile.

Does business insurance cover damage or looting that occurs during a riot?

Usually, yes. Your standard business owner’s policy would be enough to address losses suffered (property damage, lost product) during a riot, strike, or other instance of civil unrest. So, you don’t need separate crime insurance coverage if your only concerns are the recent protests in Washington and cities around the country.

What are some tips for preventing business theft?

Whether or not you elect to purchase crime insurance, there are many things you can do to help discourage theft and dishonesty at your workplace. Installing video cameras—especially near cashboxes or registers is always a good idea. Keeping careful record of all cash, checks, and receipts is another best practice. Experts recommend immediately marking checks as “FOR DEPOSIT ONLY.” And though it’s a good idea to get to the bank daily (so cash and checks aren’t left lying around), your routines shouldn’t be too predictable (such that employees or their associates know when and where they can find you carrying a lot of money).

Finally, invest the time needed into hiring and retaining good employees. Conduct background checks and personality evaluations. Contact all references. Cultivate a positive culture in your workplace so that good people want to stay. (High rates of employee turnover coincides with incidents of theft and dishonesty.) And train your teams in how to respond to different types of threats—onsite, off site, and online.

For more information on commercial crime insurance, contact our team of experts at 508.339.2951.